How To Calculate Interest Earned On Investment

Compound Interest Formula:

\[ A = P \times (1 + \frac{R}{n})^{n \times T} \] \[ I = A - P \]

Principal Amount (P):

Annual Interest Rate (R):

Compounding Frequency (n):

Time Period (T):

years

Maturity Amount (A):

Interest Earned (I):

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1. What is Compound Interest?

Compound interest is the interest calculated on the initial principal and also on the accumulated interest of previous periods. It differs from simple interest, where interest is not added to the principal for subsequent calculations.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

\[ A = P \times (1 + \frac{R}{n})^{n \times T} \] \[ I = A - P \]

Where:

\( A \) — Maturity amount (future value)
\( P \) — Principal amount (initial investment)
\( R \) — Annual interest rate (in decimal form)
\( n \) — Number of times interest is compounded per year
\( T \) — Time the money is invested for (in years)
\( I \) — Interest earned

Explanation: The formula calculates how much an investment will grow over time when interest is compounded at regular intervals.

3. Importance of Compound Interest Calculation

Details: Understanding compound interest is crucial for financial planning, investment decisions, and retirement planning. It demonstrates how money can grow over time and the power of reinvesting earnings.

4. Using the Calculator

Tips: Enter the principal amount in dollars, annual interest rate as a percentage, select compounding frequency, and time period in years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between simple and compound interest?
A: Simple interest is calculated only on the principal amount, while compound interest is calculated on both the principal and accumulated interest.

Q2: How does compounding frequency affect returns?
A: More frequent compounding (e.g., monthly vs. annually) results in higher returns due to interest being calculated on interest more often.

Q3: What is the Rule of 72?
A: The Rule of 72 is a simple way to estimate how long an investment will take to double: Divide 72 by the annual interest rate.

Q4: Can compound interest work against me?
A: Yes, when borrowing money, compound interest can significantly increase the amount you owe over time.

Q5: Is this calculator accurate for all investments?
A: This calculator provides an estimate based on fixed compounding. Actual returns may vary with market conditions and investment products.